Press Notice No. 37 of Session 2002-03, dated 10 September 2003
THIRTY-SEVENTH REPORT: MINISTRY OF DEFENCE: THE CONSTRUCTION OF NUCLEAR SUBMARINE FACILITIES AT DEVONPORT (HC 636)
Mr Edward Leigh MP, Chairman of the Committee of Public Accounts, said today that it was unacceptable that the taxpayer was footing a bill £300 million more than expected for the construction of nuclear submarine facilities at Devonport, and urged the Ministry of Defence to get a proper grip over the final phase of the project.
Mr Leigh was speaking as the Committee published its 37th Report of this Session, which examined progress on the project for the construction of nuclear submarine facilities at Devonport. Since the Committee's 1999 report on the sales of the Royal Dockyards, which included coverage of the original contract for submarine facilities, there have been very large cost overruns. In August 2002 costs were estimated to total £933 million; MOD will meet nearly all of this, paying £890 million in total, £314 million more than its previous assurances to the Committee. By its own admission MOD has partly funded poor performance by Devonport Management Limited (DML), the prime contractor, met the cost increases resulting from nuclear safety regulation, and borne the cost of all other risks originally transferred to DML.
The Committee found that the main parties to this project did not come together early enough to engage on those issues which were key to its successful implementation. The Department, DML, and the nuclear regulator began work on the project four years before contract signature. Despite this, work on the detailed design, safety cases and construction did not progress smoothly. The parties failed to establish in advance how the civil nuclear regulatory regime would apply, and what the role and responsibilities of each would be. As a result, there were unforeseen additional requirements and design and construction work had to be redone at significant cost.
The Department's attitude to risk transfer was unrealistic. As it considered that it had transferred the great majority of risk to DML, it took a hands-off approach to the project's management. In certain areas, however, risks were shared with the Department retaining significant design and nuclear responsibilities. The true extent of any transfer had also been limited by DML's maximum liability, and there were higher-level risks which the Department could not transfer, such as the impact on the United Kingdom's strategic nuclear deterrent if the facilities were late. Before entering into a contract, departments should undertake risk assessments which cover not only the risk allocation explicitly set out in the contract but also those higher-level risks which lie outside it. Contracts should contain the necessary monitoring and control mechanisms to enable departments to manage effectively those risks they retain.
From a situation where DML supposedly bore the majority of risk, the Department now bears virtually all risk itself. It has agreed to meet the great majority of the cost increase to date, and has, in effect, assumed liability for any further cost overruns as it has placed no limits on DML's capitalisation of additional costs. The Department will also contract separately for the final phase of the project. It will need to exert tight control over the remainder of the project to avoid further increases in the cost to the taxpayer.
Mr Leigh said today:
"The assurances that the Ministry of Defence gave this Committee in the past about this project were hollow. From a position where the great majority of risk was supposed to have been transferred to the private sector, it is unacceptable that the taxpayer is now picking up most of the bill for overruns; over £300 million more than expected.
It is vital that the Department get a proper grip over the final phase of the project to avoid further cost escalation, working more closely with the contractor, completing design and safety cases before construction and assessing fully the risks it retains."
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